Policy, Guns and Money

The costs of cutting steel

A young woman arc welding part of an anti-tank gun in a munitions factory in South Australia in 1943.

In 2013, the early replacement of the Anzac frigates was proposed as a way to bridge the shipbuilding ‘valley of death’. The idea was to continue building AWD hulls and equip them with a combat system based on the Anzac upgrade now underway.

Even starting tomorrow, it’s doubtful that such a scheme would preserve more than a subset of white-collar jobs at the shipyards. Yet the idea survives, and has grown into an ambition for a continuous-build program involving as many as twenty vessels. The number of hulls has grown because a continuous-build program has to be fed by the taxpayer, either by routinely retiring vessels before their economic life or by building a larger fleet than the RAN needs.

But the imperative for domestic shipbuilding is weak and the costs would be high, so why does the idea persist? Two factors are at play: lobbying by incumbent firms and the politics of South Australian jobs. The latter is especially potent given the likely foreign build of the Collins replacement. As for the expense of jettisoning recently-upgraded Anzacs, the consoling thought is that we could bolster regional maritime capabilities by gifting vessels to Indonesia and potentially selling others to New Zealand. Read more

What would the proposal cost? That depends on many factors, including the reduced life and/or increased number of the surface combatants. Then there’s the competiveness of local shipyards.

The head of DMO recently testified to a Senate inquiry that ‘a productive yard, building continuously’ could have built the first AWD in 3 million work-hours, and that 4.7 million had been allowed for the local build’s cold start, yet the current estimate for the first vessel stood at 9.3 million. Using the per-capita annual cost of labour at ASC ($132k) and the estimate of 2,000 annual hours per worker from 2013 Submarine Skill Plan, the additional cost of the first vessel can be estimated (excluding shipyard overheads and material costs for rework):

Work-hours Labour cost
Continuous production 3.0 million $198 million
Originally planned 4.7 million $310 million
Now expected 9.3 million $615 million

Thus, on the basis of labour costs alone, we’ve spent at least $305 million more than planned, and $417 million more than best-practice for the first vessel. I say ‘at least’ because Australia has high wages. The US Bureau of Labor Statistics ranks Australia 6th out of 34 OECD countries in hourly compensation for manufacturing, and 7th out of 16 for the sub-category including shipbuilding.

It’s hoped that a continuous-build program would lift Australia’s shipyard productivity. Although higher productivity won’t reduce wage rates (and will do the opposite if wages are linked to productivity), it’s still worth asking how much improvement is realistically possible.

The Anzac program is often held up as a paragon of efficiency, with ten vessels delivered for $9.3 billion in 2012–13 dollars. Lacking better data, labour use can be estimated by multiplying its 125-month duration by the reported 1,223 prime contractor and 1,337 subcontractor personnel in 1994–95. Using the former as a minimum, this implies between 2.5 and 5.3 million hours per vessel. Noting that an Anzac is only 60% the displacement of an AWD, this is hardly impressive if a ‘productive yard’ can build an AWD in 3 million hours.

In comparison, Denmark has recently built three frigates at a cost of US$325 million per vessel (PDF) or around US$383 million including the value of reused equipment from retired vessels. Labour use was 700,000 hours per hull. As the table below shows, the contrast with the cost of our AWD and Anzac programs is startling.

And the Danes didn’t cut corners; their vessels are larger and better equipped than our Anzacs—including with SM-2 missiles.

  Unit cost ($A million) Displacement
Cost per kg ($A/kg) Labour (hours) Crew
Danish Frigate 435 5,452 80 700,000 101
Anzac Frigate 932 3,600 259 >2,500,000 163
AWD 2,700 6,250 432 *6,200,000 202

*Average figure assuming that the second two vessels are each built using half the labour of the first.

How did they do it? To start with, the vessels were built in an efficient civil yard by an established workforce. In addition, lessons from civil design were adopted to make the vessels easy to build and cost-effective to maintain—hence the relatively small crew. And Denmark has access to low-wage module construction on the other side of the Baltic.

Australia’s naval shipyards would undoubtedly benefit from more efficient designs and construction techniques—and the Danes are already working with Canadian shipyards to help them to this end. Nonetheless, we’ll never have a commercial steel shipbuilding sector to leverage. And we’re poorly placed to access low-wage yards for module construction. If we build ships in Australia, we’ll pay a premium.

A practical alternative would be to build frigate hulls offshore and fit them out locally (as with the Canberra-class LHD). Doing so would allow us to focus on strategically relevant, high value-add areas such as systems integration rather than cutting steel.

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Flickr user State Library of South Australia.

On economics and submarines

A lesson for submarines

According to the South Australian government, the Australian economy will be better off by $21 bn if our next generation of submarines is built in-country rather than purchased from overseas. With the Abbott government likely to make a decision about the submarines soon, the claim deserves close examination.

The underlying analysis is set out in a paper from the SA Economic Development Board  based upon commissioned work done by the official-sounding National Institute of Economic and Industry Research. It’s a short paper, running to only nine pages, and sparse in detail. Read more

The paper compares two options:

  • purchasing 12 submarines from overseas and performing only light maintenance on the boats in Australia;
  • building 12 submarines in Australia and performing both light and heavy maintenance in Australia.

The options posited immediately skew the analysis by assuming that with the foreign build option, heavy maintenance would be done offshore. It fact it would be feasible and advantageous to perform heavy maintenance in-country. In case there’s any doubt, we successfully executed an extensive mid-life upgrade of the British-built Oberon class boats.

As a starting point, the paper assumes that it would cost $20 bn to acquire 12 boats irrespective of where they are built at the baseline exchange rate of 92c to the US dollar. Thus, at today’s exchange rate of 88c, we already face a $900 million premium for a foreign build.

But recent experience demonstrates that there’s a substantial premium associated with building ships in-country (albeit one that depends on the prevailing exchange rate). As Andrew Davies put it, in the case of the $8.1 bn Air Warfare Destroyer (AWD) project, we’re getting three ships for the price of four, not counting recent cost blowouts and the lost value of increasingly delayed delivery. Estimates of the effective rate of assistance for the Landing Helicopter Dock and AWD programs come in at 70% and 33% respectively.

Not only is the higher up-front cost of local construction ignored, but the analysis unreasonably privileges future spending by omitting a net-present-value calculation of costs—which matters a lot given the unrealistic assumption about off-shore heavy maintenance and the 40-year time-horizon of the model.

The SA paper also ignores the ‘agency’ problems of local build. First, it can be desperately hard to get acceptable productivity from a domestic monopoly—as our sorry experience with submarine maintenance shows. Second, and as we’ve seen, an incumbent local supplier will form a natural alliance with unions and the state government to shift risk and cost increases back to taxpayers.

The SA paper then makes matters worse by modelling the economic impact via an input–output model. One of us has already blogged about the shortcomings, but the essential features are easy to recount.

The problem’s best explained by thinking of a ship built in Australia. The workers and local subcontractors will receive income, which they will largely spend on other locally-produced goods. By using data on the inputs and outputs of Australian producers of those goods, it’s possible to trace the direct and ‘multiplier’ effects of the spending on GDP and tax revenue.

That’s fine, but such an analysis ignores the alternative use of the labour and other inputs—it assumes they’ll sit idle if our hypothetical ship isn’t built. In reality, market forces will redeploy them elsewhere in the economy where they will contribute to GDP and pay taxes. That’s especially true in any long-run scenario—and this modelling stretches over 40 years.

The unreality of input–output modelling is well understood, so more sophisticated general equilibrium modelling is the standard approach for addressing long-run ‘what if’ questions about policy. The SA paper rejects general equilibrium modelling on the grounds that ‘no capacity constraints are anticipated in the labour market’. That is, it assumes that there will be a pool of unemployed in Australia for the next 40 years who, but for the opportunity, have the aptitude to become highly skilled engineers and trades persons. Indeed, as there are no ‘ramp up’ costs in the model, it assumes all these skills and resources already exist—in obvious contrast to the findings of the RAND study.

If the economy really was as static and unresponsive as assumed in input–output modelling, we could never have absorbed the resource boom. Nor would we ever have recovered from the removal of tariffs on cars, footwear and clothing. But we did, and the economy responded with new jobs in new areas. More importantly, consumers came to enjoy cheaper prices. There’s a lesson here about buying submarines. The economic argument for mandating local construction is ultimately no different to the neo-mercantilist arguments which sought to hold back productivity-boosting reforms of the 1980s and 90s. Then as now, the focus should be on the overall benefits rather than those concentrated in the hands of a few.

Henry Ergas is a senior economic adviser, Deloitte Access Economics, and professor of Infrastructure Economics, University of Wollongong. Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Flickr user sea turtle.

South Australian defence industry summit

Start lineI was pleased to be invited to speak at the South Australian Government’s Defence Industry Policy Summit (PDF) earlier this week. I was invited in my role as a member of the Defence White Paper Expert Panel, and was asked to help set the scene for the discussion that followed. Here’s what I told the meeting.

Thanks for the opportunity to be here today. My topic is the Defence White Paper process, but I’m not able to say much about that as it’s still very much a work in progress. So let me give you the response I give everyone who asks me how it’s going. ‘It’s everything I expected it to be’.

In terms of this gathering, I’m not sure that the DWP is the most germane document. There are several important pieces of policy work going on in parallel, some of which will have at least as large an impact, particularly the development of a Defence Industry Policy Statement (DIPS), a shipbuilding plan and the First Principles Review of Defence’s organisation. Development of the DIPS is something that I and my Expert Panel colleague Mike Kalms were asked to take on by the Defence Minister here in Adelaide back in June. Read more

As a result of that, we’ve been touring the country to consult with industry groups and making site visits. We’ve heard some clear and consistent messages along the way from industry, and I’ve found some of the visits to be real eye-openers. I’ve been impressed with the industry capability and capacity I’ve seen in various places. That will all help inform the DIPS.

As for the DWP, I think it’s important that the discussion that ensues today takes into account the environment in which work is proceeding. Firstly, the federal government has made it clear that it’s going to continue to make major capability decisions. It has committed something like $20 billion to acquisitions such as the F-35 Joint Strike Fighter, P-8 Poseidon maritime patrol aircraft and the Triton surveillance drones. By doing so it’s avoiding the bottleneck in projects that’s accompanied previous DWPs—sometimes as much as 18 months of deferred decisions, which has a flow-on effect to ADF capability and to industry work-flow.

Second, it’s possible that major decisions will be made about shipbuilding and submarines prior to the DWP release. It’s also possible that they won’t, and I can say with high confidence that no decisions have been made to date. I think it’s fair to say that there are inclinations, but there’s still time for the sort of submission that will come from this meeting to influence the process.

Third, there’s the budget situation. In its first budget the government made good on its promise to increase defence spending. If it sticks to its pledge to reach 2% of GDP by 2023/24, Treasury forecasts suggest that the budget that year will be around $45 billion in today’s terms. That compares to this year’s $29 billion, amounting to an additional $16 billion to invest. That’s a lot of additional capability that can be acquired, and a lot of industry support to be purchased. There should be plenty of opportunity for industry. Not so much in the first few years, as there’s a shortfall from the underfunding of the 2009 DWP that has to be made up, but in the years to come there’ll be lots of new investment.

Finally, but possibly most importantly, there’s a whole-of-government policy environment that has to be taken into account. That’s worth studying for clues about government thinking on industry and innovation. A good place to start is the new Industry Innovation and Competitiveness Agenda (PDF) released last week. It had several policy objectives of relevance here, most notably boosting competitiveness and fostering ‘excellence, not dependence’. It also identified five growth sectors, which represent areas of comparative advantage in the Australian economy. The one of most relevance to defence is ‘advanced manufacturing’,

The Agenda observes that Asian countries are increasingly reducing trade barriers, reducing inefficient public spending, reducing taxes and improving competitiveness. In that environment, Australian industry will have to be innovative, be working at world’s best practice standards, nimble and—in the defence space—provide a capability-edge for the ADF. When putting forward business cases for defence industry investment, they’ll need to be couched in terms of competitive advantage and capability edge, not just ‘net benefit’, however calculated.

Finally, let me swap hats and become an ASPI commentator for a minute. As those of you who read The Strategist—which should be required reading—would know, I was much impressed by the productivity gains I saw in local shipyards recently. The touch labour productivity on the AWD is showing a learning of about 20% between vessels one and two, with a projection of between 10 and 15% from vessels two to three. That’s close to world standard.

Similarly, the Collins availability is much improved, suggesting that the Collins story is more about lack of resources than poor industry performance. Actually, it’s probably a combination of both, but increasing resources has enabled better performance. ASC has some way to go to be world’s best practice standard, but the trend is good.

One final comment. When I read today’s press clippings, I saw the call for a competition for the design and construction of the future submarines. As I’ve said before, that’s the way to do it.

Andrew Davies is senior analyst for defence capability and director of research at ASPI. Image courtesy of Andi Sidwell.

Defence projects, jobs and economic growth

HMAS Anzac under tow as it prepares to re-enter the water from Henderson Naval Base where it spent twelve months undergoing an upgrade.

In a recent post, Andrew Davies explained how the government ignored Defence’s advice and chose the MRH90 over the Black Hawk helicopter—presumably because the former offered more for local industry.

There’s nothing intrinsically wrong with considering industry factors in defence procurement. As John Harvey reminded us, a local preference can legitimately be based on defence self-reliance and/or broader economic benefits. Consistent with this, government announcements routinely tout the economic benefits of defence projects. For example, this year’s F-35 announcement said:

The acquisition of F-35 aircraft will bring significant economic benefits to Australia, including in regional areas and for the local defence industry with more jobs and production for many locally-based skilled and technical manufacturers.

The message is clear; the more work that’s done in Australia the better. In the case of the F-35, it’s likely true. Rather than rely on offsets, Australian firms compete with foreign manufacturers to supply the global F-35 program so that only internationally competitive firms thrive. In other instances, local sourcing occurs absent foreign competition and at a sizable cost premium, such as the troubled Air Warfare Destroyer Project where we are getting three vessels for the price of four. Read more

What’s the lure of having work done locally? Apart from expectations of achieving greater self-reliance and more cost-effective through-life support (each a canard for another post), decision-makers probably believe that there’s a net economic benefit from having work done in Australia even at a premium.

The notion that local production delivers an economic benefit has been cultivated by those eager to avoid foreign competition. DefenceSA, the South Australia Government’s defence lobbying arm, has produced two glossy publications (here and here) that extol the economic and industry benefits of local shipbuilding.

The DefenceSA reports quote an economic analysis of the Anzac Ship project commissioned by the Australian Industry Group in 2000. The scanned copy of report can be found here (PDF) and its companion report on the Huon minehunter project is here (PDF). The reports employ two methodologies to estimate the economic impact of projects: input-output multiplier analysis and general equilibrium modeling.

Multiplier analysis estimates the gross economic impact of spending, and the table below summarises the key results from the Anzac and Huon reports:

Input-Output Multiplier analysis of recent major naval construction projects



National output


Anzac frigates

$5.6 billion

$10.9 billion


Huon minehunters

$1.0 billion

$1.7 billion


Impressive numbers indeed! If only the world was so simple; multiplier analysis overestimates economic impacts by ignoring (along with much else) constraints on, and alternative uses of, inputs to production. For example, multiplier analysis assumes that each and every person employed by the project would be unemployed had the project not occurred. The Productivity Commission released a paper on the uses and missuses of multiplier analysis in 2013.

Mindful of the limitations of multiplier analysis, the Anzac and Huon reports also used general equilibrium modeling to estimate the economic impact taking account of input constraints on the Australian economy as a whole.

General equilibrium modeling of recent major naval construction projects



GDP increase

Jobs increase

Anzac frigates

$5.6 billion

$3 to 7.5 billion


Huon minehunters

$1.0 billion

$887 million


Unlike the input-output analysis, the estimated boosts to GDP and employment in the table above are net increases across the entire economy. How much confidence can we have in those estimates? Comparison with analogous estimates in a 1994 Industry Commission report are informative. Depending on the assumptions made—none of which were unreasonable—an increase in local defence sourcing could result in either an increase or decrease in GDP and employment. Confused yet?

As best I can tell (not being an economist) two assumptions drive the results. First, the extent to which employment is held as a fixed constraint in the model. Second, the assumed productivity enhancement arising in firms engaged in the project. Weak employment constraints and higher productivity yield greater benefits, and vice-versa.

Given ongoing strong competition for skilled labour and the low productivity of (at least) the naval shipbuilding sector, recent local purchases such as the AWD have probably not had anything like the bountiful impact claimed by the Anzac and Huon analyses—certainly nothing like what would be needed to cover the substantial premium being paid.

Nonetheless, we should be wary of definitive claims either way about the economic impact of buying defence equipment locally. But with $78 million already committed to progress a local build of frigates to replace the Anzacs (wastefully early), the government needs to get some evidence-based advice on the economic costs and benefits of local construction sooner rather than later. As I’ve suggested in the past, the Productivity Commission would be a good place to start.

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Department of Defence.

Future frigates: hasten slowly

HMAS Perth transits through the Southern Indian Ocean as an Orion P-3K from the Royal New Zealand Air Force searches for debris as part of Operation SOUTHERN INDIAN OCEAN.My colleague Mark Thomson despairs over the prospect of the early replacement of Navy’s Anzac frigates on cost-effectiveness grounds. He’s probably right, but I worry instead about the possibility that the capability implications and project complexity have been underestimated.

Let’s start with the positives of the proposal to develop the Navy’s future frigates around the basic hull and mechanical components of the air-warfare destroyers (their naval designation is DDG) currently under construction. The first—and, in my opinion, the best—reason was well articulated by the Chief of Navy in his ASPI White Ensign Dinner speech, when he pointed out the virtues of commonality of systems across the fleet. For a 52-ship Navy, there’s a surprisingly large number of designers and suppliers in the support network.

Second is the potential for naval shipbuilding to become an ongoing program, rather than a stop/start process. Every new program comes with its own start-up costs, both the direct costs of the people and infrastructure required and the indirect costs of an inexperienced workforce. The AWD/DDG program shows only too clearly how much grief that can cause. By the time a number of ships have been rolled off the line, most of the initial bugs are sorted out and efficient production ensues. By the time the tenth Anzac was launched, production was humming along nicely. Read more

Both of those arguments will stand or fall on the numbers; commonality and continuity aren’t ends in themselves, but ways to achieve economies. For now I’ll leave that to Mark, but I’ll make the point that any economic argument for local shipbuilding should consider through-life costs. The maintenance of Navy’s vessels is almost by definition a local activity, and there’s the possibility of synergies with local construction.

Balanced against those potential advantages is the potential disadvantage of a large scale, long term investment in local naval shipbuilding industry, in which the political stakes lock in a substantial part of the force structure, reducing the discretion future governments have. (Mark and I made this observation in the context of proposed rolling production of submarines.) No doubt Navy and the shipbuilders would love that development, but it’d amount to a long-term bet on the enduring demand for particular platform types.

Turning now to the capability and project management aspects of the recently announced future frigate work:

… preliminary design work … will focus on continued production of the current AWD hull, suitably adapted and utilising capabilities from the cutting-edge Australian companies CEA Technologies Australia and SAAB Combat Systems.

Let’s start with some basics. The seakeeping and stability of the 5,000+ tonne DDGs depends on a number of design factors, not least the distribution of weight in the superstructure and masts. Swapping out many of those systems for new ones isn’t as simple as it sounds. Additionally, the new frigates are intended to be ASW specialists, and will presumably need two helicopters and their associated hangars and support facilities. I’d guess that some of the real estate required will come at the expense of existing DDG systems—maybe the frigates won’t have the full 48-cell vertical launch system? (Though more firepower is always useful.) So a fair proportion of the ship above the waterline will be new.

Those aren’t insurmountable problems, and it’s not beyond the wit of man to modify the existing designs to meet the new requirements. But they won’t be small changes; they’ll exceed the modifications to Navantia’s original design required to produce the Hobart class. If we want continuity at the conclusion of the AWD program, it’d be a challenge to achieve a stable design and the required production engineering in time.

Turning to the systems, the air-defence solution developed for the Anzacs is rightly being proclaimed a success by Navy and the contractors involved. The Saab 9LV combat management system/CEAFAR radar combination is a terrific local innovation. But it doesn’t have some of the features that might otherwise be identified as requirements for the future frigates. For example, the Aegis system on the DDGs is integrated with the Cooperative Engagement Capability which allows the vessel to participate in third-party targeting with other vessels and the Wedgetail AEW&C. While the Anzac air defence solution will provide some capability against ballistic missiles in their terminal phase, if the full range of ballistic missile defence capability is required, the frigates would need sensors with an exo-atmospheric capability and SM3 missiles for the engagement.

Again, those probably aren’t insurmountable problems. But they’d present significant development and systems integration challenges—hence cost and schedule risks. The alternative is to do without those capabilities, which is a reasonable option, but any such trade-offs must be well understood by decision makers. It’s possible that pursuing a ‘quick and easy’ future frigate will prove to be anything but, and it might come with larger than expected capability compromises. One potential approach is a staged development, with two or three early ships being essentially larger Anzacs, and adding more capability into the larger hulls later—that’d certainly be less risky than shooting high from the start.

Andrew Davies is senior analyst for defence capability and director of research at ASPI. Image courtesy of Department of Defence.

Shipbuilding—Australian style

Anzac class frigate HMAS Perth at the International Fleet Review,  October 2013. Minister for Defence, Senator David Johnston, has announced the government would 'bring forward preliminary engineering and design work necessary to keep open the option of building the future frigate in Australia'.Last Friday, the defence minister announced no fewer than three shipbuilding initiatives.

First, to the dismay of the Australian Manufacturing Workers Union (PDF) and the indignation of the opposition, the government announced that it would seek bids from Spain and Korea to build two new replenishment vessels for the RAN. The new vessels will replace the ageing replenishment vessel HMAS Success (18,000 tonnes) and the modified commercial tanker HMAS Sirius (47,000 tonnes).

Although the vessels could’ve been built in Australia, it makes sense to go offshore. Not only would a local build require new infrastructure, but the low productivity of local yards would further drive up the cost. Given the benchmark of the AWD, where we’re getting three vessels for the price of four (and counting), the local premium would be upwards of 33%.

Nonetheless, the vessels won’t come cheap. The Spanish spent around A$350 million dollars to build SPS Cantlarbia (19,000 tonnes), while the British have ordered four Tide Class vessels (37,000 tonnes) from Korea for around A$240 million each. Defence’s 2012 estimate for the two vessels (PDF) was above $1 billion, so the taxpayer is at least a couple of hundred million dollars ahead. Read more

The government also announced plans to build more than 20 steel-hulled patrol boats in Australia. These vessels will replace the 22 boats currently operated with Australia’s assistance by 12 Pacific island states under the Pacific Patrol Boat Program. The specification of steel hulls will disappoint Australia’s highly-capable aluminum shipbuilders, but it has probably been justified by the need for robust, easily-maintained vessels.

The local sourcing of the patrol boats looks to be a sop to Australian industry; Asian shipyards could undoubtedly build the vessels much more cheaply. What’s more, the small size and simple design of the vessels will do nothing to nurture the high-end skills needed for future local projects such as the new submarines.

To make matters worse, the Minister has said the project will ‘generate additional work for yards around Australia’. Thus, rather than capturing economies of scale at a single site, work will be shared around the country, resulting in duplicated fixed costs and multiple company overheads. The only consolation is that the slug to the taxpayer from the patrol boats will likely be less than the saving on the replenishment vessels. Viewing the former as the political quid pro quo for the latter, there’s still a net gain.

Without doubt, the most interesting announcement was that the government would ‘bring forward preliminary engineering and design work necessary to keep open the option of building the future frigate in Australia’. Taken at face value, that announcement is difficult to fathom. A replacement for the Anzac frigates has long been planned for the end of the 2020s, and the prevailing assumption has always been that the vessels would be built locally. To achieve that, the 2012 Defence Capability Guide (PDF) planned on first-pass approval around 2019-20 and second-pass around 2022-23. So there’s plenty of time for a local build.

Rather, the option that’s being kept open now is a specific proposal that industry has been pushing quietly behind the scenes. The suggestion is to take the combat system and radar developed for the Anzac frigates by the Australian companies CEA Technologies Australia and SAAB Combat Systems, and to incorporate them into hulls like those currently being built by ASC for the new destroyers.

As well as leveraging the highly successful work done on the Anzac frigate upgrade, the proposal has the potential to provide continuity of work for ASC and its subcontractors. By doing so, it’s argued, hard-won productivity gains on the AWD project (assuming they eventually materialise) can be used to reduce the cost of the future frigates. What could be better—the incumbent firms each get a piece of the pie and the taxpayer saves some money?

But wait a second. On known plans, substantive work on AWD fabrication will end long before it’s necessary to start work on building the Anzac replacements. Even after the two-year delay to the AWD, fabrication will have ended by 2018 and work on the new frigates isn’t due to start until post 2022. So what’s going on?

A hint can be found in Defence’s 2013 Future Submarine Industry Skilling Plan (PDF) (subtitled A Plan for Australia’s Naval Ship Building Industry). Turn to page 170 and look at Scenario 7. There’s the solution: we can achieve continuity by retiring the Anzacs early. The previous government confirmed this when it talked about ‘bringing forward the replacement of the current Anzac Class frigates’.

There’s no way that marginal productivity gains from continuity will offset the cost of recapitalising the frigate fleet four or five years early. While other nations are looking at how to keep their vessels in service for longer, we’re doing the opposite just to keep our shipbuilders in profit for longer. I despair.

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Wikimedia Commons.

F-35B JSF for the ADF—a viable option in the 2015 White Paper? (Part 2)

Three F-35B Lightning II Joint Strike Fighters with Marine Fighter Attack Squadron 121, 3rd Marine Aircraft Wing, fly in formation during fixed-wing aerial refuelling training over eastern California, Aug. 27, 2013. In my last post, I considered the operational and technical challenges of Australia acquiring F-35B STOVL Joint Strike Fighters and operating them from the Canberra class LHDs. In an ideal budget environment, were the decision to acquire the F-35B in the 2015 Defence White Paper to be made, the Abbott Government would also acquire two or three dedicated aviation support vessels to support them, and leave the LHDs purely for undertaking amphibious operations. But as the May 2014 budget has made clear, Australia doesn’t live within an ‘ideal budgetary environment’ and it seems unlikely additional ships will be forthcoming. If Australia does acquire the F-35B, they’ll have to operate from the LHDs (with all the technical and operational challenges that that would involve) or from forward land-bases as part of an expeditionary operation. Read more

I also raised the issue of how the F-35B would be used in relation to the declared Principal Tasks in the 2013 Defence White Paper. In considering the actual implementation of the Principal Tasks, the question of where the ADF might operate, against which powers, and under what conditions is important. Strategy is practical—not theoretical—and Australia’s maritime strategy has to have utility in the real world if it’s to be credible. Despite the 2013 White Paper’s rather rosy view of China’s role in Asia, it’s becoming clear that China’s rapid military modernisation, its assertive behavior in the East and South China Sea, and the growing regional security dilemmas emerging in the form of regional military modernisation, will increase the risk of conflict in the future. In that future, the risk must be that Australia will be drawn into a regional conflict involving the United States and China.

In that scenario it’s likely that US military forces would have access to Australian military facilities in the north and west. It also seems plausible that the ADF, working alongside US air and naval forces, would be required to respond to Chinese attempts to deny US forces a sanctuary in Australia from which to conduct operations against China. That could involve Chinese forces seeking to contest Australian air and sea approaches, and launch attacks on US forces operating from Australian facilities. Based on language in the 2013 White Paper, the ADF’s response to such a challenge would be to ‘…deter attacks or coercion against Australia by demonstrating our capability to impose prohibitive costs on potential aggressors and deny them the ability to control our maritime approaches’. Furthermore, the ADF might also ‘…undertake operations against adversary’s bases and forces in transit, as far from Australia as possible. … using strike capabilities and the sustained projection of power by joint task forces, including amphibious operations in some circumstances’.

Does the F-35B STOVL JSF operating from Canberra class LHDs offer a viable capability in this scenario? The technical and operational challenges noted in my first post are real and can’t be ignored, and would need to be resolved for the F-35B/LHD combination to be effective. More broadly, a more serious risk is surface ship survivability in the face of growing antiship cruise missile threats from submarines and aircraft. The strategic geography of Asia makes anti-access warfare even more effective, especially for naval mines, missile-armed fast attack craft, and missile-armed submarines that the Chinese Navy is highly proficient with.

It’s in countering the advantages bestowed by strategic geography on an adversary practising anti-access operations where a small force of F-35Bs deployed on LHDs might play a significant role. The F-35 Joint Strike Fighter’s key advantages are purported to be stealth, integrated avionics and an ability to network with off-board sensors—all of which contribute to the pilot in the F-35 having an information advantage over an opponent, whether that opponent is in the air, on land or on the sea. If the F-35B is seen as a key node in an intelligence, surveillance and reconnaissance (ISR) network that contributes towards an expeditionary force gaining a knowledge advantage at the tactical level, then a force of F-35Bs on board LHDs will add to the joint task force survivability. Information gathered by the sensor systems can be exploited by the F-35B to attack detected targets, or the F-35B can act as a sensor in a ‘sensor to shooter’ link, with the ‘shooter’ being a naval vessel or a submarine. Furthermore, the F-35B can exploit austere bases on land—known as forward arming and refuelling points (FARPs)—to operate in support of naval task forces in archipelagic waters, thus easing operational challenges and risks for the LHDs.

Certainly, if the LHDs are to be sent forward, with the F-35B on board as part of an Australian effort to ensure air and sea control within our maritime approaches, they would need to be well protected by an accompanying naval task force. The risk is that much of the RAN’s existing operational strength could be absorbed by such a role, reducing its operational flexibility, or demanding greater investment in additional ships such as more AWDs. Suddenly, the 2% of GDP spending aspiration of the Abbott Government mightn’t be nearly enough, and so the fundamental challenge of matching strategic ends with national means becomes critical. Australia should begin its consideration of F-35B JSF for the LHDs fully aware of the potential follow-on costs.

In conclusion, there are risks associated with pursuing the F-35B STOVL Joint Strike Fighter for the ADF. The LHD/F-35B combination is certainly not a match made in heaven. Of the three variants, the F-35B is the least effective in terms of performance and payload, and the most expensive. Only a small number could be carried onboard the LHDs, and at the expense of other important capabilities. But an F-35B acquisition could offer the ADF a more flexible way to undertake the Principal Tasks, even in the face of growing threats from an adversary’s anti-access ability.

Malcolm Davis is assistant professor in International Relations and post-doctoral research fellow in China-Western Relations at Bond University. Image courtesy of Flickr user Marines.

The JSF and the issue of ‘new money’

The Chief of Air Force, Air Marshal Geoff Brown, AO gives the Prime Minister, The Hon. Tony Abbott MP, a tour of the cockpit of the 'mock-up' of an  F-35A Lightning II aircraft at Defence Establishment Fairbairn.

Last Wednesday, the Prime Minister and Defence Minister travelled to Fairbairn airbase to announce Cabinet had approved the purchase of a further 58 F-35 Joint Strike Fighters at a cost of $12.4 billion. It should have been a red-letter day for the Abbott government; an election promise fulfilled, Australia’s defences strengthened, and work aplenty for local industry. But it didn’t quite work out that way.

To start with, confusion abounded at the press conference about where the money was going to come from. An increasingly perplexed media tried to make sense of statements like

…this is not new money, it’s money which successive governments have carefully put aside to ensure that our nation’s defences are strong.

 We have been putting the money away, a line item called ‘air combat capability’ and it’s been there, it’s been building up and it’s in the Budget.

 So, this is not new spending today, in the context of a tough Budget, this is spending money that we need to spend that has been sensibly put aside in the past to ensure that our nation’s defences remain strong.

The successive quotes (there are more I could’ve used) reflect persistent questioning by incredulous journalists. You can read the transcript for yourself here.

Read more

As best I can tell, the Prime Minister and Defence Minister were forthright and honest in their answers. For anyone versed in the arcane world of government finance and its curious terms-of-art, the responses make perfect sense. Trouble is, few people are initiated into that club—hence the confusion. More importantly, the media were actually onto something. Let me explain.

There’s no escrow account or trust fund designated ‘air combat capability’. Rather, the notion of money ‘put aside in the past’ refers to a planning provision made in prior years. That is, Defence’s forward financial plan has for many years included a provision to acquire the F-35 around the latter half of this decade. No actual funds have been deposited anywhere, but within the overall funding promised to Defence an allowance has been made for the purchase of the F-35.

Moreover, there’s nothing special about planning provision for the F-35 acquisition. There are similar provisions made in Defence’s financial plan for personnel expenses, fuel, ammunition, gold braid etc., just as there are provisions in the government’s broader financial plan for pensions, hospitals and schools in the years ahead.

By saying ‘this is not new money’, all that’s meant is that the aircraft will be purchased from within the existing funding planned for Defence.

So far so good. But the iron rule of government spending is that each dollar can be spent only once. Every dollar spent on defence is unavailable for spending on health or education or pensions. And on this count, the journalists’ instincts were on target. The money to pay for the F-35 aircraft is yet to be raised by taxes—in fact it’s yet to be earned by taxpayers. Just because someone entered some numbers into a spreadsheet a couple of years ago doesn’t erase the hard fact that the F-35 purchase will impose an opportunity cost in terms of either higher taxes/debt or reduced government spending elsewhere.

Which brings me to the second complication surrounding last Wednesday’s announcement; everybody knew the Treasurer was scheduled to give a speech that evening to make the case for a hard budget—and he delivered in trumps. The result was a bonanza for cartoonists , with Alan Moir, Andrew Dyson, and Ron Tandberg all having a go, and with David Pope weighing in twice (here and here). (My favorite was John ‘Polly’ Farmer’s effort for the Hobart Mercury, but it’s not available online.)

I expect that the government will think twice in future before it announces a multi-billion defence acquisition immediately prior to the Treasurer giving a speech with such choice quotes as ‘we are spending money we don’t have’ and ‘we must learn to live within our means’. But from my viewpoint it was the right thing to do—defence spending and the opportunity cost it imposes on society shouldn’t be sheltered from scrutiny.

On the contrary, just as the Treasurer presented a reasoned and evidence-based case for a hard budget, the government needs to take the same approach to explaining why Australia needs a strong defence. Unless they do, the promise of spending 2% of GDP on defence will prove to be as unsustainable as the budget position the Treasurer described last week.

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of the Department of Defence.

The Joint Strike Fighter—an air combat capability enhancement

A 'mock-up' of the F-35A Lightning II aircraft (commonly known as the Joint Strike Fighter) on display at Defence Establishment Fairbairn.

Debate surrounding Australia’s air combat capability has often been emotive and controversial, most recently in relation to Australia’s acquisition of the F-35 Joint Strike Fighter (JSF). The decision announced on 23 April 2014 to purchase another 58 JSF, in addition to the 14 already approved in 2009, has reignited debate on the suitability and affordability of fighter aircraft that are the ‘very best of breed’.

Unlike bombers and attack aircraft that focus on ground targets, fighter aircraft are primarily designed for air-to-air combat. A fighter’s main purpose is to establish air superiority over a battlefield—a sensible and necessary precursor to winning the ground fight. Modern fighters are fast, stealthy, sophisticated, and expensive. The JSF fits all those descriptors. But it’s still the best option available to Australia.

Australia’s unique and enduring geo-political circumstances demand a balanced defence capability that includes the best fighter aircraft we can incorporate into our arsenal. We remain the world’s only island continent, positioned on the cusp of the most globally dynamic region. Read more

Air supremacy is shaped by multiple, complementary factors, including pilot training and skill, sound and effective doctrine, and the overall quality of the fighter aircraft itself. The balance of all those things is critical. Great pilots are made exponentially better by great aircraft and doctrine. The reverse is also true.   

Recent negative commentary about the JSF doesn’t reflect the improved status of the program and its importance in helping deliver an effective air combat capability to Australia’s defence strategy.

The majority of informed and credible senior US officials—those with access to detailed information on and direct responsibility for the F-35—describe a program now on track to deliver the most capable multi-role fighter in the world.

General Mike Hostage, Commander US Air Force’s Air Combat Command, said in February this year, ‘I am going to fight to the death to protect the F-35, because I truly believe that the only way we will make it through the next decade is with a sufficient fleet of F-35’s. If you gave me all the money I needed to refurbish the F-15 and F-16 fleets, they would still become tactically obsolete by the middle of the next decade…..I am fighting to the end, to the death, to keep the F-35 program on track.’

Mr Frank Kendall, Under Secretary of Defense for Acquisition, Technology and Logistics said in September 2013, ‘The F/A-18 is a great airplane, but it’s a fourth generation fighter. The F-15 is a great airplane, the F-16 is a good airplane, but they’re fourth generation fighters, and you get a quantum improvement in capability out of the F-35’.

Lieutenant General Chris Bogdan, Program Executive Officer for the JSF program, said earlier this month while he was in Australia that ‘This is a different program to the one it was a few years ago. I can’t change where it’s been but I can change where it is going’. And, General Mark Welsh, Chief of Staff for the US Air Force, stated in February this year ‘We are on track for IOC. That is the USAF achieving the initial operating capability of the aircraft in 2016, four years in advance of Australia’s requirement’.

It’s important that uninformed or unbalanced criticism shouldn’t derail a critical key element in future Australian defence planning and capability.  

More positively, Australians should note that the JSF Project is now on track to produce a devastatingly effective first-rate military capability, and one about which any future Australian adversary will—and should—always ponder with great caution.

And, finally, to the issue of cost; considered last, because while the JSF will be expensive, it won’t be prohibitively so. In any case, cost shouldn’t be the sole determinant where matters of national defence are concerned. 

The reality is that a first-rate military capability is always expensive—but not nearly as expensive as military defeat.   

It’s often practically useful in defence or military issues, to view matters through the eyes of a potential adversary. Where Australia is concerned, particularly from the perspective of its continental defence, an informed conventional aggressor would likely think twice about—and fear—two Australian military capabilities over all others: state-of-the-art submarines and airpower.

And while the actual ‘live’ use of either capability has now all but completely receded from the living memory of contemporary Australians, an enemy planner still sees them as ‘game-changing’ deterrents. Both capabilities give true strategic reach and strike (a much misused term in public commentary), as well as proffering potent and comforting insurance to, and for, all Australians.             

Andrew Nikolic is the Federal Member for Bass and a former Australian Army officer. He is a former First Assistant Secretary of International Policy Division, and a member of the Joint Standing Committee on Foreign Affairs, Defence and Trade. Image courtesy of Department of Defence.

Editor’s note: The Strategist welcomes contributions on the government’s F-35 procurement decision.

Boats to patrol the Pacific

Karl PPB

Calls to fast-track the construction of new patrol boats to replace Navy’s hard-working but troubled Armidales, partly to help forestall the valley of death facing the nation’s naval shipyards, occur amid continuing debate over the cases for and against paying a premium to produce advanced vessels in Australia. Make-work programs to preserve ship-building job and skills are particularly controversial.

Given the complexity of the arguments now swirling over whether to replace the Armidales early (the youngest is barely six years old) it’s nice to be able to point to a naval manufacturing opportunity that’s warranted on strategic grounds alone, irrespective of any industrial or other benefits: Canberra should move to implement the Pacific Maritime Security Program. The PMSP is due to start replacing up to 22 old Pacific Class Patrol Boats (PPBs) in 12 countries from 2018 but isn’t funded in the forward estimates. Read more

On the surface, the prospect of gifting boats to replace vessels that haven’t always been well-used might appear extravagant with the Defence budget so tight. Current PPB performance varies greatly across the fleet but problems have included non-security related tasking (such as for VIP transport), some rough-handling including periodic runnings-aground, erratic routine maintenance, and disappointing rates of effort. By 2011, the PPBs were achieving 66 sea-days per boat per year, up from just 36 in 2008, but far fewer than the over 200 for the RAN’s patrol boats (which have two crews). PMSP wouldn’t be inexpensive either. Shadow Assistant Defence Minister David Feeney—an enthusiast—estimates 20 or so steel-hulled boats purpose-built in Australia for regional conditions would cost just under $300 million to deliver. Total costs could reach $1.5 billion over 35 years.

Yet the PMSP isn’t just ‘defence aid’. It’s more accurately viewed as a form of forward-defence and regional conflict prevention, which will be good for regional countries but also profoundly in our own national interest. Although far from cheap, it represents a cost-effective investment in being able to help shape, rather than merely react to, regional events.

For Australia, PMSP will preserve regional capabilities to police a vast area we’d otherwise have to look after ourselves. Working with local militaries, police maritime elements, and customs services to support their effective self-help is preferable to us asking (or being called upon) to act in other peoples’ jurisdictions. Supported by a small network of posted RAN personnel, PMSP will also promote a continuing welcome for the ADF’s, low-key but visible, enduring strategic presence across our maritime approaches. Familiar and valued cooperation delivers both direct benefits—such as extra reach for our search and rescue efforts or deterring drug-smuggling aimed at Australian markets—and indirect value, such as situational awareness, influence, and opportunities to engage traditional regional partners—the US, France and NZ. It may also moderate any adventurism by actors from outside the region, whether ascendant powers, marginalised states, or investors.

For participating countries, PMSP will modernise cooperative efforts to protect marine resources, enforce sovereignty, and counter transnational crime. The program should include enhanced surveillance, coordination, and technical-legal collaboration to make the most of the new boats. The absence of a follow-on to PPB would heighten vulnerability to socio-economic sources of instability. Fishing is critical to regional countries, but they are hard-pressed to protect their resources, having mostly small populations and large EEZs. Illegal fishing already plunders a billion dollars from regional coffers each year. And economic pressures could contribute to the need for lengthy, costly and risky stabilisation missions.

PMSP could also be progressed without a large one-off spend. Introducing a couple of boats per year as the current PPBs reach their maximum extendable lives from 2018 to 2027 would spread acquisition costs. Enhanced aerial surveillance and other potentially expensive components of PMSP could also be added gradually as economic circumstances and operational tempo permit.  Cheaper, potentially suitable, foreign patrol boat designs are available, though with some symbolic and practical downsides. NZ could chip in (it already provides PPB personnel) given its Cook Islands and wider responsibilities. And wealthier recipients may value PMSP more if they make a contribution in return for some say in capability specifications. A proportion of costs for non-military vessels might be deemed aid-eligible for non-strategic tasks such as food security. Hand-me-down Armidales would be prized for their sleek lines—they aren’t your grandfather’s PT boat—and might fill a short term gap, but could also be uneconomical and unsustainable over the longer term.

Whatever option Government chooses, PMSP deserves some numbers against it in next month’s budget alongside the much larger figures for grander investments in our maritime security.

Karl Claxton is an analyst at ASPI. Map (c) ASPI 2014.

What do the AWD problems tell us about the future submarine?

I recently took a look at the ANAO’s audit of the Air Warfare Destroyer (AWD) program. The report is a solid read at 320 pages, but should be required reading for anyone making decisions about the future submarine. And there should be a test afterwards.

The first, and most important lesson is the need for design stability—and for the design to be in a form readily digestible by those who need to turn it into hardware. A great many of the problems experienced in the AWD build have been due to either changes in design details, or the difficulty of translating the design drawings into concrete production activities.

The ANAO’s figure 5.7 (reproduced below) shows the number of entries in the project’s ‘problems and issue reports’ database by category. Nearly half the records related to design issues. The fault for those problems shouldn’t be laid solely at the feet of Navantia as the design house, although there have been attempts to do so. But it’s worth understanding what went wrong.

Figure 5.7: Categories of problem and issue reports, July 2009 - April 2013 Read more

Part of the problem is that this is the first time that Navantia has exported a design. They’re used to preparing drawings for its own workforce in its shipyards at Cádiz—a workforce familiar with both the design philosophy and the technical drawing equivalent of ‘shorthand’ employed and, more importantly, the tacit knowledge of ship production assumed by the designers. An inexperienced Australian workforce struggled to translate them into executable work. This problem reflects the lack of a shared understanding of design and build approaches—an issue that should’ve been identified during the long and costly analysis that lead to the selection of the Navantia design (of which the shipbuilder ASC was a party).

Exacerbating this problem, the Australian workforce lacked critical skills at the production supervision level. In the case of the well-publicised problems with the poor quality of the blocks built in Melbourne, Defence’s 2010 advice to the Minister is pretty clear:

… the poor build quality was largely the result of BAE Systems not having sufficient experienced production supervisors—workshop engineers and foremen—despite being one of Australia’s most experienced shipbuilding organisations.

BAE were having none of it, there were again attempts to lay the blame at Navantia’s feet, and we were treated to the unedifying spectacle of ASC and the DMO arguing the toss with BAE in the press. The ANAO makes it clear that there’s plenty of blame to go around.

Now all this might be OK if it was behind us, but it looks far too much like a taste of things to come. The future submarine project will face all of these problems and more. In the case of the AWD, we started a build with a first-time shipbuilder and an inexperienced workforce. Seven years on, productivity remains well behind planned levels and even further behind industry standards for an experienced yard—the result of a combination of overoptimistic planning and ineffective production management. That’s despite the benefit of starting with a design that was pretty well understood, with a similar vessel already in production in Spain.

The future submarine won’t be like that. If it’s to come anywhere near the articulated requirements, it won’t have much in common with boats elsewhere. If we stick with the expected European conventional submarine technology and an American combat system and weapons, we’ll have to import design elements from more than one supplier. In short, we’ll be starting a harder journey from no better a starting point than the AWD.

That’s not an insurmountable problem. Given time and resources, we could pick our way through the challenges, hire the experienced people needed to manage the project and do the due diligence required to stabilise requirements and, subsequently, the design. It’s having the time that’s likely to be the issue; much of the discussion about Australian naval shipbuilding has focussed on the so-called ‘valley of death’ facing the blue collar workforce as AWD work winds down. And that is a problem—workforce productivity takes time to build up to best practice standards. But we need to be careful not to embrace costly ‘make work’ projects with cost premiums that exceed the savings which continuity of work might deliver via higher productivity.

I’d argue that much more important at this stage is managing and harnessing the skills required at the white collar end of the process—the engineers, designers and production managers who have to sign off that the chosen submarine design is fit for purpose and ready for production. I fear that we’re already at the wrong end of the valley for many of those skills as the design work for the AWD recedes into the past. The ANAO estimates that the overall productivity in the AWD build is such that it’s costing $1.60 for every planned $1 worth of work. Their report suggests that a lot of that is to do with design and production issues, not just fabrication.

My high school metalwork teacher used to exhort us to work with ‘less haste and more speed’, which I think is exactly what’s needed for the future submarine. Here’s my dot point list of things we need to do:

  • ensure that senior engineering and design personnel from those firms chosen to provide major systems are embedded in the project team, not on the other side of the world
  • accept that we’ll need to import production techniques as well—which means that shipyard foremen and production supervisors should be imported with the design
  • ensure that we have a stable and suitably documented design, and resist the urge to get to the metal fabrication stage as soon as possible as a means of providing shipyard jobs.

Andrew Davies is senior analyst for defence capability at ASPI and executive editor of The Strategist.

Free financial advice

Financial planning?

Over the past two decades, Defence has staggered from one budget crisis to the next, trying to afford the unaffordable.

Of the five White Papers issued between 1976 and 2009 for which ex post fact evidence is available, only the Howard Government’s 2000 effort was funded as planned. All the rest ended up delivering substantially less money than promised. To make matters worse, for most of the period in question, Defence was planning beyond its means anyway, by systematically underestimating both its acquisition and recurrent costs. Thus, even if promised funding had been forthcoming it would’ve been inadequate for the task. Defence’s plans were damned twice over. Read more

In practice, there’s little that can be done to force governments to keep their commitments; politicians routinely break promises. On the other hand, it should be possible to curtail the habit of underestimating costs. With a new White Paper underway, now’s a good time to start.

The problem is hardly unique to Australia; one of the ‘key drivers’ of the UK’s 2010 Levene inquiry into structure and management of the Ministry of Defence was ‘the Department’s over-extended programme’. It was no mistake that Lord Levene mentioned ‘affordable’ or ‘affordability’ 32 times in his report. Overly optimistic planning leads to wasteful cycles of overinvestment followed by underinvestment as financial reality overtakes military fantasy.

Levene’s solutions for the United Kingdom are largely built around improved governance and accountability. But while such approaches are likely to be valuable to Australia in the longer term, the clock is already running on the 2015 White Paper; we need practical measures now to ensure that the resulting plan for the ADF is affordable.

The good news is that we aren’t starting with a blank spread sheet. Over the past decade, Defence has made steady progress in understanding its current and future costs. The sorts of egregious underestimates of acquisition costs that appeared back in the 2001 Defence Capability Plan (DCP) are much rarer today. At the same time, the ongoing refinement of Defence’s budget has led to a better understanding of recurrent costs than in the past. These are firm bases upon which to build.

Nonetheless, the government should treat Defence’s cost estimates with great caution. Two interplaying factors predispose the organisation to systematically underestimate its costs.

Firstly, Defence’s civilian and military leaders are positive ‘can-do’ optimists. Nothing out of the ordinary there—most large organisations are led by similarly incautious souls who got to where they are by doing rather than naysaying (helped by a survivorship bias towards those who are lucky enough not to fail at a prior point in their career and are hence unjustifiably confident).

Second, and more importantly, moral hazard comes into play within Defence. Proponents of individual projects—for example the RAAF seeking a new fleet of aircraft—have an incentive to underestimate costs so as to get the project on the books irrespective of whether it’s affordable. Once a project is in the DCP it’s difficult to dislodge without political cost, and the problem of funding it becomes the taxpayer’s rather than the Air Force’s. For exactly the same reasons, industry has equally strong incentives to systematically underestimate future acquisition and support costs when answering initial queries from Defence.

The government needs to protect the taxpayer’s interests against the twin onslaught of self-delusion and deception. And it’s not simply a matter of worrying about the cost of projects in the DCP. To be affordable, the next White paper will need to take into account the cost of not just acquiring but of crewing and operating all of military capabilities in the ADF, along with their attendant administrative overheads, now and into the future. This means building a detailed model of the Defence budget.

An effective model of the defence budget would combine bottom-up estimates of the cost of individual activities—such as maintenance programs and acquisition projects—with projected trends in key cost drivers such as personnel expenses, foreign exchange rates, equipment and facilities maintenance costs. Critically, the model shouldn’t be designed to deliver a single estimate but rather to capture the spread of possible future costs given the inherent uncertainties and credible ranges for economic trends.

In some way or form, Defence will already have many of the building blocks of such a model—if only to support the annual budgeting process. But to guard against a conspiracy of optimism again delivering an unaffordable plan for the ADF, the government should ensure that the model is comprehensive and credible. There’s no shortage of consulting/accounting firms which could both assist Defence with the development of the model and warrant its robustness to the government.

Defence could also benefit from external help to understand the cost of its major programs. One way to do this would be to get independent cost estimates for the top 30 projects by value in the DCP, including the personnel and operating costs associated with new capabilities—an area that the 2011 Rizzo Report found wanting. Apart from helping to guard against conscious and unconscious internal biases, independent advice would inject additional technical rigour into the process. Estimating the cost of major projects (defence or otherwise) is a technical exercise, so outside help would certainly come in handy. To get a feel for the complexities, have a look at this 2005 study by the RAND Corporation on the UK government’s carrier project or this 2008 NASA Cost Estimating Handbook.

Amid the heady discussion of defending Australia against the myriad uncertainties of the Asian century, the question of reliable costing can easily be dismissed as a sideline. Who can be bothered with financial niceties when there’re issues of grand strategy to be discussed? Let’s hope the government can be bothered. As the Levene Report observed, reliable financial planning ‘is not a distraction from providing the capability the country needs; it is an essential enabler to it’.

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Flickr user Images Money.